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2 ‘Strong Buy’ Stocks Goldman Sachs Predicts Will Surge Over 40%

The stock market is finding support right now from two directions, a perception that the Fed is turning slightly dovish and will be a little less aggressive on its rate hikes going forward, and the Q2 earnings, which are coming in better than analysts had feared.

The S&P 500 might still be down 10% for the year, but the index has gained 17% since its mid-June low, and with the macro environment appearing friendlier, investors will be hoping the change of sentiment won’t be a temporary one.

Against this backdrop, Kash Rangan, a 5-star analyst from Goldman Sachs, has picked out two stocks that show room for plenty of gains in the year ahead – in his view, on the order of 40% or better. In fact, the Goldman view is no outlier. Running the tickers through TipRanks’ database, we found out that each boasts a “Strong Buy” consensus rating from the broader analyst community. Let’s take a closer look.

Dynatrace (DT)

We’ll start in the world of cloud infrastructure. Dynatrace is a leader in IT observability – that is the ability to assess a system’s present state according to the data it generates, such as metrics, logs, and traces. Observability is considered an essential component in managing a successful company these days and the cloud monitoring market is expected to grow significantly over the next few years. This is no surprise, as enterprises are migrating at ever growing numbers to the more efficient environment of the cloud, making infrastructure software easier to sell. The company boasts a list of big clients, which includes, Kroger, SAP, Carnival, and Experian, amongst many others.

That there’s strong demand for Dynatrace’s cloud and application monitoring platform was evident in its latest quarterly report – for fiscal Q1 2023 (June quarter). Specifically, revenue increased by 27.4% year-over-year to $267.27 million, beating Wall Street’s expectation of $261.83 million. Non-GAAP EPS of $0.18 also beat the $0.17 consensus estimate.

Goldman’s Kash Rangan liked the look of the print, writing: “Results largely validate our thesis that Dynatrace is a unique software infrastructure provider in that the company’s technology stack is deployed by customers not just for application monitoring and in production environments, but also in front office business use cases (for example real-time metrics on digital go-to-market assets) and in development environments. As such, Dynatrace’s strategic position is improving and customers are deploying Dynatrace more broadly and are also purchasing new modules as Dynatrace’s product portfolio expands.”

These bullish comments underpin Rangan’s Buy rating while the analyst’s $62 price target leaves room for 12-month gains of ~47%. (To watch Rangan’s track record, click here)

Overall, the Strong Buy consensus rating shows that Wall Street generally agrees with the Goldman take here. Dynatrace has 13 reviews on record, including 12 Buys and 1 Hold. The shares are priced at $42.19 and their $51.73 average price target suggests a one-year upside potential of ~23%. (See Dynatrace stock forecast on TipRanks)

Datadog, Inc. (DDOG)

The second Goldman pick we’ll look at here is Datadog, which also operates in the cloud-services observability space. Datadog offers customers the tools needed to monitor, track, and secure their cloud-based platforms and apps in real time. Datadog’s tools include automation, monitoring and instrumentation, source control and bug tracking, and troubleshooting and optimization. The Datadog platform also allows customers to seamlessly navigate through logs, metrics, and traces, to get the best use of the collected data, for proactive management.

All of that may sound like a mouthful, and it’s really just a small taste of what Datadog does, but one thing is clear: this is a service that is essential in today’s increasingly digitized work environment. This can be seen from the company’s revenues and earnings over the past couple of years, which mostly show a consistent pattern of sequential quarterly gains.

That trend was on display when DDOG released 2Q22 earnings earlier this month. Revenue saw a 74% year-over-year growth to reach $406.14 million, above the Street’s forecast for just under $382 million. Non-GAAP EPS of $0.24 more than doubled from the same period last year while also bettering the $0.15 anticipated by the analysts. And for the full year, the company guided for revenue between $1.61 billion to $1.63 billion, and for adjusted net income between $0.74 to $0.81.

Goldman’s Rangan sees the outlook as conservative, but he is in no doubt regarding the bull thesis. He writes, “We believe with a long-term secular shift to the public cloud, as supported by our recent IT Survey report, spending on infrastructure software remains robust. Based on the strength of Datadog’s expanding product portfolio that addresses critical aspects of customers’ cloud migration, coupled with a solid profitable business model that generates rising FCF margins alongside hyper-growth, we believe it’s poised to grow into a preeminent infrastructure software business.”

Overall, Rangan thinks DDOG shares have some way to go, and by some way, we mean 88% of upside. Those are the returns investors are looking at, should the stock make it all the way to Rangan’s $214 price target. No need to add, the analyst’s rating is a Buy.

As for Wall Street, the consensus view is that DDOG shares deserve a Strong Buy rating. The stock has 19 recent analyst reviews on record, and they break down 16 to 3 in favor of Buys over Holds. With a trading price of $113.54 and an average price target of $143.13, the stock has a potential upside of 26% for the year ahead. (See Datadog’s stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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